The 2024 U.S. presidential election is nearing its final stretch, with some polls showing Democratic nominee Kamala Harris holding a slight lead. If Harris secures a win, what could that mean for the financial markets?
A recent survey of Bloomberg Terminal subscribers showed that institutional investors believe a Harris victory would be better for Treasuries and worse for stocks than a win for Donald Trump. However, historically the stock market tends to rise regardless of whether a Democrat or a Republican is president.
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“The S&P 500’s average annual price return, in data going back to 1945, has been an 11% gain under Democrats and a 7% advance under Republicans, according to data from Sam Stovall, chief investment strategist at CFRA Research,” said Bloomberg. “Only one of the last six presidents, George W. Bush, has seen the S&P 500 fall under his watch — and he left office in the midst of the Great Recession.”
For billionaire hedge fund manager John Paulson, a Harris win is reason enough to be on the sidelines.
“If Harris was elected, I would pull my money from the market,” Paulson said in an interview with Fox Business , suggesting he’s ready to exit if her victory becomes a reality.
Tesla CEO Elon Musk took notice. In a post on X , Musk reshared the report of Paulson’s comments, adding his own twist: “Buffett is already preparing for this outcome.”
Let’s dive into what these billionaires might be anticipating.
Crash and recession fears
Paulson has voiced significant concerns over Harris's tax plans, particularly a potential tax on unrealized capital gains that was among Biden's proposals, which he believes could have dire consequences for the economy.
“If they do implement a 25% tax on unrealized gains, that would cause mass selling of almost everything, stocks, bonds, homes, art. I think it would result in a crash in the markets and an immediate, pretty quick recession,” he warned.
In an interview with CNBC , “Shark Tank” investor Mark Cuban dismissed the likelihood of such a tax being enacted.
“Every conversation I’ve had is that it’s not going to happen,” Cuban said, revealing that he has frequent discussions with Harris's team. “Their verbatim words to me is, ‘That’s not where we want to go.’”
Still, Paulson’s concerns extend beyond just capital gains. He’s also wary of other potential tax hikes under a Harris administration.
“They want to raise the corporate tax rate from 21 to 28%,” he said. “They want to raise the capital gains rate from 20% to initially 39% now they flip-flopped back to 28%.”
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An important element of Harris's tax plan is the proposed increase in the corporate tax rate from the current 21% — a figure established under the 2017 Tax Cuts and Jobs Act spearheaded by the Trump administration — to 28%.
If Harris wins and Paulson follows through on pulling his investments, where does he plan to park his money?
“I'd go into cash and I'd go into gold, because I think the uncertainty regarding the plans they outlined would create a lot of uncertainty in the markets and likely lower markets,” he explained.
Buffett’s growing cash pile
Paulson’s strategy reflects a defensive move in times of anticipated market instability. By holding cash, he preserves capital and maintains flexibility, ready to seize opportunities when the market stabilizes.
As Musk noted, Paulson might not be the only billionaire preparing for turbulence — Warren Buffett could be following a similar strategy.
Buffett’s company Berkshire Hathaway has reduced its stakes in major holdings like Apple and Bank of America in 2024. The result? Berkshire is sitting on an enormous cash reserve.
As of June 30, 2024, Berkshire’s cash, cash equivalents and short-term investments in U.S. Treasury bills totaled $276.9 billion. A significant portion of this — $234.618 billion — is parked in Treasury bills, a highly liquid asset often regarded as a "safe haven" due to being backed by the full faith and credit of the U.S. government.
Musk speculated that Buffett’s positioning could signal a looming market correction.
“He is clearly expecting a correction of some kind or otherwise simply cannot see better investments than Treasury bills,” Musk commented in response to an August post on X about Buffett’s growing cash pile.
Bearish signal or business as usual?
Musk isn’t alone in interpreting Buffett’s massive cash reserve as a bearish signal.
In May, Bill Smead, CIO of Smead Capital Management, told Yahoo Finance that Buffett “is bearish on the stock market.”
“He shows this by growing his massive cash position to $200 billion, selling Apple shares and saying that he doesn’t see bargains,” Smead noted.
However, not everyone sees it that way. Fund manager Chris Bloomstran told Business Insider in July that the situation is more nuanced.
He noted that Berkshire’s large insurance operations necessitate a substantial cash reserve to cover potential payouts. Moreover, given Berkshire’s size, its range of suitable investments is limited. Bloomstran pointed out that with Treasury bills offering decent yields, Buffett can afford to be patient.
Buffett himself has addressed concerns about his cash strategy, explaining his cautious approach during Berkshire’s annual shareholders meeting earlier this year.
“I don't think anybody sitting at this table has any idea of how to use it effectively, and therefore we don't use it,” he stated, emphasizing that “we only swing at pitches we like.”
Buffett has also voiced concerns about future complexities, noting, “As the world gets more sophisticated, complicated and intertwined, more can go wrong.” He added that the company aims to be prepared to “act when that happens.”
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This article provides information only and should not be construed as advice. It is provided without warranty of any kind.
